On the occasion of the World Economic Forum on Africa 2012 that is taking place in Addis Ababa, Ethiopia, from 9 to 11 May 2012, KPMG Africa has released a report on Foreign Direct Investment (FDI) in Africa.
The report, titled African Emergence – The Rise of the Phoenix, discusses key themes around the three mega-trends currently shaping business in Africa, specifically high demand for natural resources, increased consumerism by an emerging African middle class and large-scale investments into infrastructure.
The report finds that while Africa offers significant investment opportunities, the continent has not yet reached its potential. Yunus Suleman, Chairman of KPMG Africa Limited, comments, “FDI is an essential component of Africa's sustainable, positive future. And it's good for investors too – there is undoubtedly money to be made in Africa, recognised today as one of the world's most attractive hgh growth markets. Understanding FDI, what it means to Africa as much as to the global investor, accessing these funds and securing the desired returns, are all very much part of today's African story.”
The end of the Cold War more than two decades ago brought new freedom to Africa. People started to demand political representation and called on governments to be more transparent. Democratic features were introduced and vibrant civil society emerged fighting for more rights. The pressure to transform was irresistible and with political transformation, came economic transformation – state-centred structures and policies were swept aside and, while elements of this legacy linger, private ownership and entrepreneurship have replaced the idea that the state will and can provide.
Increasingly, investors have become aware not only of the risks of investing in Africa, but the risk of not investing in the continent. They have become more focused on where in Africa to invest, as opposed to whether to invest or not. Increased awareness of the potential size of the African consumer market, and a number of significant discoveries of oil and minerals in recent years, which have again highlighted the natural resources potential, have all played their role in attracting additional investment to the continent. Concurrently, an increased interest from foreigners and local governments alike to address the continent’s infrastructure challenges, has seen increased investment in roads, rail and ports.
While FDI into Africa has increased dramatically over the last decade, from US$110 billion at the end of 1998 to US$554 billion at the end of 2010, the overall FDI amount is still relatively small compared to other emerging market economies. China alone attracted US$578.8 billion at the end of 2010, more than all African countries combined. Brazil had FDI worth US$472.6 billion. “However, improvements in the business, political and macroeconomic environments across the continent have made African economies more attractive than ever before,” Suleman continues.
“Unlike China, India and Brazil, Africa is not a country: it is a continent of 54 very diverse countries, each with its own natural and cultural endowment as well as regulatory environment to be navigated through. While regional economic integration is creating greater economies of scale and lesser complexity, doing business in Africa must be guided by a deep understanding of the landscape and experience in stewarding successful translation of the immense opportunities into rewarding returns. Without this direction, many international investors have burnt their fingers and somewhat contributed to the earlier skepticism about the prospects of the continent. Those who have been guided through the complexity of Africa have realised premium returns unseen anywhere else in the world and are part of the emerging story of Africa as a priority investment destination,” says Josphat Mwaura, CEO, KPMG in East Africa.
Africa still exports mainly minerals and hydrocarbons. The top five hydrocarbon exporters, namely Algeria, Angola, Egypt, Libya and Nigeria account for 50 percent of all exports from Africa. They have experienced an 89.2 percent increase between 2001 and 2010, mostly due to an increase of petroleum exports. Of all oil exports from Africa, Europe and the United States account for about a third, with gradually decreasing amounts during recent years. China and India have most of the market share and have maintained robust economic growth rates despite the global financial crisis. Demand for non-oil commodities from Africa, such as gold, platinum, diamonds, iron and copper are equally shifting from Europe and the United States mainly to China. By the end of 2010, 12.9 percent of Africa's non-oil exports went to China, almost five times the amount of 10 years earlier. This dependence on exports of natural resources makes Africa vulnerable to volatility in global commodity prices.
The expanding economies of Asia and Latin America will enhance trade with Africa in the future. Traditionally most FDI in Africa has targeted North African countries. With the Arab Spring in 2011, this picture changed in favour of sub-Saharan Africa. This trend is expected to continue over the next decade, since sub-Saharan countries have become more attractive destinations for FDI. Inner-African investment remains weak, amounting to about five percent of the volume of all FDI, most of it contributed by South Africa. Nevertheless, Nigeria and Kenya are playing a more important role in West and East Africa respectively.
The idea of a 'gateway' into Africa has become a dated concept. Entry into African markets now mainly depends on the nature of the investment. Suleman elaborates, “Practically, there is no single 'gateway' but several 'gateways', obviously including South Africa but with Egypt, Kenya, Mauritius and Nigeria (and others) representing no less an opportunity. There is empirical evidence to suggest that, in a few years time, South Africa may no longer be the largest economy on the continent. Nigeria is expected, with several other countries, to close the gap.
“All of this drives higher investment from companies and countries seeking a foothold in Africa and looking to take a share of the tremendous wealth and potential that has yet to be unlocked. What we have seen to date is the tip of the proverbial iceberg – the continent has much more to offer and investments will continue to flow.”
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